On April 1, 2015, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware (the “Court”) found that an action to compel an annual shareholder meeting is not barred by the automatic stay. The motion (the “Motion”) before the Court was that of Jeffrey R. Brooks (“Brooks”), a holder of common stock in debtor, SS Body Armor I, Inc., a Delaware corporation (“SSBA”), seeking relief from the automatic stay as necessary to enforce Delaware state law rights to compel SSBA to hold an annual meeting.

On April 14, 2010, SSBA and its debtor affiliates (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. SSBA’s by-laws require an annual meeting of its shareholders. However, SSBA has not held an annual meeting since September 9, 2009. On November 28, 2014, Brooks issued a demand that the shareholder meeting be held. As of the date of the Court’s opinion, no shareholder meeting had been scheduled or held, and SSBA opposed any efforts to schedule or hold such meeting.

In finding that an action to compel an annual shareholder meeting is not barred by the automatic stay, the Court adopted the holdings in Johns-Mansville and Marvel Entertainment.1 The Marvel Entertainment court, relying in part on Johns-Manville held that the election of a new board of directors may be enjoined only under circumstances demonstrating “clear abuse.” The Marvel Entertainment court described “clear abuse” as requiring a showing that the shareholders’ actions in seeking to elect a new board of directors demonstrates a willingness to risk rehabilitation altogether in order to win a larger share for equity. The Marvel Entertainment court, however, also noted that a shareholders’ action motivated to gain bargaining power in the negotiation of a reorganization plan, without more, does not constitute clear abuse.

The Debtors opposition to the Motion sought to enjoin the occurrence of a shareholder meeting based on the clear abuse exception. The Debtors asserted that Brooks, whose family holds approximately a 25% interest in SSBA, sought to compel the shareholder annual meeting in order to elect a new board of directors to reevaluate or abandon a global settlement (the “Proposed Settlement”) currently before the Court. The Proposed Settlement is incorporated in a plan and proposes to (i) provide the Debtors with an exit strategy, (ii) resolve a variety of litigation matters, (iii) resolve competing claims to approximately $180 million of restrained assets; and (iv) provide for an interest-free $20 million loan to the Debtors to fund a chapter 11 plan that the creditors’ committee has agreed to co-sponsor.

While the Court recognized that there was an argument to be made that clear abuse may be present in this case, the Debtors opposition to the Motion seeking an injunction was procedurally improper, rendering the Court unable to address the requested injunction. The Court noted that if the Debtors present a motion for injunction based on the clear abuse standard, in the context of an adversary proceeding as required pursuant to Rule 7001(7) of the Federal Ruled of Bankruptcy Procedure, the Court might enjoin the meeting or the implementation of the results of such meeting upon a showing of “clear abuse.”